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Economists Letter on the California Cap-and-Trade Program

The following is an excerpt from a letter signed by 58 PhD economists urging the California Air Resources Board (CARB) to strengthen and adopt their proposal for the California Cap-and-Trade program. It was submitted on December 13, 2010.

We commend the California Air Resources Board

We commend the California Air Resources Board (CARB) for its vision and leadership in the design of the proposed cap and trade regulation. An emission cap, combined with a range of regulatory and market-based implementation mechanisms, provides clear incentives for changes in business practices and the development of new technologies. We applaud CARB for laying the groundwork for the largest carbon market in the United States.

We support the maximum use of auctioning as the method of allocating allowances

We recommend the maximum use of auctioning as the method of allocating allowances, subject to a short initial period of adjustment. Auctioning is preferable because it raises revenue for the State of California, it provides a sharper price signal, and it avoids conferring a competitive advantage on incumbent firms. We would support a modest amount of free distribution of allowances to a carefully considered subset of trade-exposed industries, subject to periodic review.

We recommend a mid-course update of the identification of sectors singled out for special treatment due to potential leakage

We support distributing free allowances only for the purpose of addressing emissions leakages associated with trade-exposed industries. However, CARB staff has noted that limitations on the availability of data and staff resources¹ diminished the quality of the analysis that was performed to assess sectoral vulnerability. We, therefore, recommend that CARB complete a reassessment of leakage risk by 2014 and not specify how the protocol for special treatment of leakage would apply during the period 2015-2020.

We recommend returning a significant portion of the allowance value to the people of California

Although we expect the State to help finance investments designed to achieve low-cost emissions reductions, help adapt to climate impacts, help disadvantaged communities, and provide job training to acquire the skill sets needed for the new technologies and industries, the State should have flexibility in using the auction revenue.

All of California will benefit from the improved health and lower pollution levels that will result from CARB’s implementation of California’s landmark legislation. We believe these policies can improve our energy security, create new business opportunities and more jobs, and provide incentives for innovation.

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